Dr. Joachim HockertzDeputy CEO, Director for Commerce, AB Lietuvos dujos

European Economic CongressKatowice, 17 May 2011

THE NORTH-EAST DIMENSION: GAS-PIPELINE INTERCONNECTION

WITH THE BALTIC STATES

22

Infrastructure & Quantities 2010

Estonia 0.7 0.7

Latvia 1.8 1.8

Lithuania 3.1 1.5

Finland 4.5 4.5

UGS 2.3 BCM working gas capacity

New CS near Vilnius

Lietuvos dujos after privatisation:

annual investment into new gas infrastructure quadrupled

overall nearly 300 mln EUR invested in infrastructure

system grew by one third in terms of km

all major projects implemented in time and below budget

10.1 bcm = 5.6 bcm (LT,LV,EST) + 4.5 bcm (FIN)

Single Supplier

UGS

Transit 1.4 C

C

3

Regulation & Market: Infrastructure (1/2)

Free TPA to 100% of Lietuvos Dujos’ infrastructure guaranteed by strict laws and regulations reality on high level (~60% of national consumption in last years),

since more than a decade - without regulatory complaint

Government entitled to decided on strategic projects, company obliged to implement

Based on Government proposal 5% cap on pre tax return on assets (RoA) included in Law

4

In natural gas infrastructure sector investment payback period > 15-20 years

According to the 3rd Energy package, TSO must annually prepare ten-year network development plan.

Long-term planning is binding for gas transmission and distribution companies according Natural Gas Law

Principles in methodology for calculating the infrastructure tariffs caps were changed: 2007-07-31 2008-08-08 (WACC introduced) 2009-10-13 (5% cap on pre tax RoA) 2010-10-06 2011 autumn: changes expected

The changes are immediately applied to calculate prices caps, despite the regulatory period is five years => i.e. the term “regulatory period” is stripped from any meaning.

vs.Instable regulatory

environment Long term investment

4

Regulation & Market: Infrastructure (2/2)

5

Market Structure Baltic States

Few household heating consumers, because district heating dominates

In terms of consumption:

Heat & power 53%

Industry 39%

Households 5%

Others 3%

More than 1 mln consumers, but just a handful big ones

…must be involved by governments, regulators and companies

Regulation & Market: Commodity (1/2)

66

LT Sales market 2002 - 2010

since mid 2007 all consumers are eligible, incl. households – however, at the same time the whole gas market became state regulated

554 589 615 645

11491546

837 746

1619 1653

545545

1223

1523

720491

28336

2198

18352066

2099

1974

1531

0

500

1000

1500

2000

2500

3000

3500

4000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Regulated market Free market

2894

28803045

3014

3563

3197

2680

LD

2680

LD

3069

TPA

TPA

Regulation & Market: Commodity (2/2)

77

“The Strategy foresees to implement a row of big projects, and then to lower natural gas consumption to zero. …”

From the recent joint comments of the Lithuanian Associations of Heat Suppliers, of Power Producers, of Biomass Energy, and of the Lithuanian Energy Consultants Association on the natural gas section of the ‘National Energy Independence Strategy’ drafted by the Energy Ministry, 27.09.2010

“By 2020 Lithuania will have the LNG terminal and, depending on timing of project completion, will have a gas interconnection with Poland.”

Draft NES prepared by Energy Ministry, approved by the Government on 06.10.2010, page 28.

Regulation & Market: Draft National Energy Strategy

8

2005 LD created new interconnection capacity with LatviaInterconnection currently strengthened by Latvijas Gaze and LD using EU co-financing

Oct 2008 - Polish TSO Gaz-System S.A. performs Open Season Jun 2009 procedure / No demand in both directions

end 2009 LD and Gaz-System create a joint working group to investigate possibilities to construct PL-LT gas link

Apr 2010 Gaz-Systems and LD send a joint application to EU COM for TEN-E co-financing of a study

Dec 2010 EU decides on 50% co-financing, remaining part equally covered by Gaz-System & LD

8

LT-PL gas link (1/4)

9

Jan 2011 tender for BCA announced

Apr 2011 contract with winner “Earnst&Young” signed, start of BCA

Summer 2011 presentation of BCA to the Boards of Gaz System and LD in case of positive Board decision:

continue with

2012 preparation of FS in case of positive results: continue with

2012 Open Season in case of positive results: continue with Engineering and Constructing

2016 in service

LT-PL gas link (2/4)

Business Case Analysis (BCA) Feasibility Study (FS)

Two phases of study

Market, regulation, demand & supply and prices forecast

Technical and environmental aspects ofthe pipeline connections

1010

LT-PL gas link (3/4)

“… The companies are delaying the construction of the interconnection by preparing a feasibility study. Allegedly, the EU has already promised to allocate the support to this project, therefore there is no sense to analyze whether the project will pay back. … I spoke on the telephone with the EU Commissioner Günther Oettinger when the Belarus gas crisis arose, and he assured the European Commission will allocate financial support for the construction of this interconnection. The companies should start concrete works …”

Energy Minister on 02.08.2010 on Lithuanian National Television

“... LD started to show demonstrative activity only after we clearly announced our determination to implement the EU directive on the separation of pipelines”

Prime Minister in Verslo žinios, 06.09.2010

1111

LT-PL gas link (4/4) Who will implement?

Article 48. Interconnection of natural gas transmission system with the European Union natural gas transmission systems

1. The Government or the institution authorized thereby shall be entitled to approve resolutions on the installation or extension of gas pipelines, natural storage facilities and LNG facilities necessary for safeguarding the security. Gas undertakings and the Regulatory Authority shall implement such resolutions.

2. When investing in the development of the transmission system, the manager (managers) of the transmission system together with the Government of the Republic of Lithuania or the institution authorized thereby shall participate in the project of interconnection of the natural gas transmission system of the Republic of Lithuania and the European Union gas transmission systems. The Republic of Lithuania shall implement its rights and duties in the project through the undertaking controlled by the Government.

3. The methodology for the inclusion of costs of the project of interconnection of the natural gas transmission system of the Republic of Lithuania and the European Union natural gas transmission systems in the costs of rendering the services of the transmission system shall be approved by the Regulatory Authority.

From draft gas law, prepared by the Energy Ministry, approved by the Government on 02.02.2011(markings by LD)

1212

Baltic integration/de-isolation initiatives FIN: 1xLNG +

Balticconnector

EE: 2xLNG + Balticconnector

LV: 2xLNG

LT: 2xLNG + UGS + LT-PL gas link

LT/LV interconnection enhancement (under construction)

Regional solution required

“LNG only” can not be considered as “interconnection”; “Solid” intercon-nection necessary

C

C

1313

Implementation of 3rd Gas Directive in LT PM declared goal: state control over gas transmission business (incl. transit) without buying out shares from foreign investors

Due to condition state control (inter alia re management, profit distribution) and state regulation (5% pre tax cap, instability) sale of transmission business hardly possible

Option Ownership Unbundling (OU) was chosen without:meaningful discussion with major shareholders and consumersimpact analysis or comparison of the options available under the Directive

LT is isolated market with single external supplier

OU would just create additional costs and higher transportation tariffs, but no positive effect on the level of competition

Transportation of gas from any source from the border to consumers inside LT is already fully safeguarded, today

Liberalization or Nationalization?

E.ON 38.9%

State 17.7%

Others 6.3%

GP 37.1%

14

2015How to proceed with LT-PL gas link project

Gas System and LD envisage in service date 2016, virtually in line with EU policy (LT Government plans a considerably later in service date)

Baltic LNG may realize earlier than 2016 (LT LNG Terminal in service date fixed by Government as 2014), but possibly cannot be considered as „interconnection“ of Baltic States

Involve big consumers and Lithuania‘s Northern neighbors

Determine gap to reach economic conditions; gap cannot be covered via consumers tariffs, only

1515

Q&A

1616

LT LNG TerminalGovernment statement (website 21.07.2010):

"… We need a pipeline connection between Klaipeda and Jurbarkas to be able to supply that liquefied gas to all consumers in Lithuania. The attempts to have the gas pipeline interconnection between Klaipeda and Jurbarkas constructed have been unsuccessful despite ten years of trying. Lietuvos Dujos is incapable of implementing this project. At this point I have to remark, as we see, what a mistake it was to privatize Lietuvos Dujos.”

“… The construction of the terminal is directly related to the implementation of the so called third package of the EU Energy Directive in Lithuania, about which the Government publicly announced in May.

The third package requires unbundling the control of gas transmission and gas distribution. The construction of the terminal would be senseless if gas transmission and gas distribution were not unbundled, because Lithuania would not be able to distribute to customers the liquefied gas delivered by sea to Klaipėda since, for the being time, the Government does not control gas transmission pipelines. ”

LD Position:

We would be happy to connect an LNG terminal, in particular because this would end speculations on the gas price. However, basic issues like the terminal’s location and capacity are not decided, yet. By law, LD is obliged both to connect such facilities and to safeguard free access to its system.

1717

EnMin’s Public Statement - Another Example

“The energy ministry told ICIS Heren that it has decided to push ahead with the unbundling to diversify supplies and to assure free access to the grid, something it says the incumbent has failed to do.”

“The energy ministry said it had made numerous attempts to convince Lietuvos dujos to build new interconnectors, and a link to a proposed LNG terminal, but had been unsuccessful.”

ICIS Heren European Spot Gas Prices, May 20, 2010

 

Lietuvos Dujos asked the Energy Ministry in writing whether it was correctly cited and, if not, to inform what the Ministry actually said.

Energy Ministry’s “answer” (translation):

“We would like to inform you, that the Energy Ministry does not comment and assess any opinions, conclusions or interpretations distributed in the mass media. …”

 

Heren confirmed that the Ministry said exactly what Heren published.

1818

Key “Argument” for Nationalization

<…> lately delayed implementation of strategic energy projects (e.g. the construction of Šakiai – Klaipėda gas pipeline) acknowledges the existing problems <…>

Implementing the 3rd EU Energy Package by ownership unbundling model, the Republic of Lithuania <...> solves the currently existing problems …

Material distributed by the Energy Ministry for the "public hearing" on 09.11.2010

regarding new gas law

All strategic projects LD implemented in time and in budget – only Šakiai-Klaipėda delayed by State.